On Wednesday, JPMorgan analyst Doug Anmuth announced an increase in the price target for Reddit (NYSE: RDDT), setting it at $110.00, up from the previous $77.00, while maintaining a Neutral rating on the stock. The adjustment follows Reddit's strong third-quarter performance and optimistic fourth-quarter guidance, which surpassed JPMorgan's estimates, consensus, and investor expectations.
Reddit's shares saw a significant uptick, trading up by over 25% after the market closed on Tuesday, driven by the company's reported revenue and adjusted EBITDA for the third quarter.
The platform's fourth-quarter guidance is based on stable macro advertising trends, and Reddit appears to be reaping the benefits of structural improvements as it continues to execute its strategy across product development, user engagement, and monetization efforts.
The company has reported consistent growth in daily active users (DAUs) both in the U.S. and international markets, with an average of 97.2 million DAUs in the third quarter, and reaching over 100 million on certain days. Reddit is also expanding its machine translation capabilities to over 30 markets through the fourth quarter and into 2025, which is expected to further support DAU growth.
Advertising revenue growth accelerated to 56% year-over-year in the third quarter, compared to 41% in the second quarter, fueled by strength across the advertising funnel. Reddit has also made significant progress with its lower-mid funnel initiatives, which now represent approximately 67% of its roadmap. Performance ads accounted for more than half of the third-quarter growth and 60% of total ad revenue, while the scaled mid-market and small to medium-sized businesses segment grew by 80% year-over-year.
The strong revenue growth, coupled with increased cost leverage, has led to a notable improvement in profitability. Adjusted EBITDA margins hit 27.0% in the third quarter, with Reddit achieving positive GAAP Operating and Net Income for the first time since the fourth quarter of 2023.
Looking forward, JPMorgan is encouraged by Reddit's growing scale of daily active users, robust revenue growth, and enhanced profitability. The firm anticipates continued execution across advertiser scale, new advertising formats and technologies, and progress toward management's long-term adjusted EBITDA margin target of 40%.
Consequently, JPMorgan has slightly raised its fourth-quarter revenue and adjusted EBITDA estimates above management's guidance, and increased its 2025 and 2026 revenue estimates by 7-9% and adjusted EBITDA estimates by 22-23%. The new price target of $110 is based on approximately 39.5 times the 2026 estimated free cash flow of $533 million and 37.5 times the 2026 estimated adjusted EBITDA of $559 million.
In other recent news, Reddit has witnessed a series of notable financial developments. Following a strong third-quarter performance, Goldman Sachs raised its Reddit price target to $105, while maintaining a neutral rating. The Q3 report highlighted substantial revenue growth, mainly driven by Reddit's advertising platform expansion and new data licensing partnerships. Additionally, Reddit's Q3 earnings exceeded expectations, with revenue and EBITDA reaching $348 million and $94 million, respectively, as reported by BofA Securities.
Loop Capital also adjusted its Reddit price target to $90, citing the platform's growing user base and increased revenue and EBITDA forecasts. This positive outlook was further bolstered by Reddit's introduction of new advertising products and strategic deals with Google (NASDAQ:GOOGL) and Open AI.
Various analyst firms, including Deutsche Bank, B.Riley, and Jefferies, have increased their price targets for Reddit, noting factors such as user growth and strong advertising sentiment. Notably, Jefferies anticipates Reddit's EBITDA to double in the next two years, primarily driven by user growth.
Reddit's decision to expand its AI-powered machine translation services to additional countries has also been well received, prompting several firms to reiterate their Buy ratings on Reddit shares.
InvestingPro Insights
Reddit's recent performance aligns with several key metrics and insights from InvestingPro. The company's revenue growth of 36.55% over the last twelve months, with an even more impressive 53.63% growth in the most recent quarter, supports JPMorgan's positive outlook on Reddit's execution strategy. This growth trajectory is further reinforced by an InvestingPro Tip indicating that analysts anticipate continued sales growth in the current year.
The platform's strong gross profit margin of 88.54% in the last twelve months reflects its efficient monetization efforts, which InvestingPro highlights as an "impressive gross profit margin." This metric aligns with Reddit's reported improvements in advertising revenue and profitability.
Despite not being profitable over the last twelve months, an InvestingPro Tip suggests that analysts predict the company will be profitable this year, which corresponds with Reddit's recent achievement of positive GAAP Operating and Net Income in the third quarter.
The market's response to Reddit's performance is evident in its stock price movements. InvestingPro data shows a strong 62.05% return over the last year and an 83.93% return over the last six months, indicating investor confidence in the company's growth strategy and future prospects.
For investors seeking a more comprehensive analysis, InvestingPro offers 16 additional tips for Reddit, providing a deeper understanding of the company's financial health and market position.
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